Value Added Tax:

Its Implementation and Implications

Dr. Saad Alshahrani

SAMA
Quarterly Workshops, 2016
2 Introduction
VA = value of output - value of inputs

VAT is a multi point sales tax with set off for tax paid on purchases. It is basically a tax
on the value addition on the product. Some economists call it a tax on consumption.

In many aspects it is equivalent to last point sales tax.

It is a general tax that applies, in principle, to all commercial activities involving the
production and distribution of goods and the provision of services.

It is not a charge on companies. It is charged as a percentage of price of goods or

services.

Introduction of a VAT will be one measure to strengthen the indirect tax structure.

Added value is the value of what the producer has added to the inputs before they are
sold as new products and services.
Source: IMF & European Commission, 2015
3 Taxes Classification and Recording
Based on Government Finance Statistics Methodology

Classified according to tax base: 1141 General taxes on goods

11 Taxes and services

111 Taxes on income, profits, 11411 Value-added taxes

and capital gains 11412 Sales taxes
112 Taxes on payroll and 11413 Turnover and other
workforce general taxes on
113 Taxes on property goods and services
11414 Taxes on financial and
114 Taxes on goods and
capital transactions
services
1142 Excises
115 Taxes on international
trade and transactions 1143 Profits of fiscal
monopolies
116 Other taxes
()
Source: IMF, 2015
4 Global Facts
The VAT is a feature of tax systems in over 150 countries.

The VAT is an ideal revenue instrument for the GCC (for div. purpose).

VAT accounts for a large share of tax revenue.

Typical rates are set up between 5% to 25%.

Global average VAT Rate is 12%.

The average rate in Africa (low income countries) is 15.5%.

Global average generation of revenue from VAT as share of GDP is 7.5%.

According to the IMF estimates, the potential revenue from the implementation of 5 percent
VAT is almost 1.6 percent of GDP for GCC countries.

Source: IMF, 2015

 5
VAT Terminology

Output VAT : Amount received by a seller as a percentage of the gross sale price of goods or
services

Input VAT : Amount paid by a buyer as a percentage of the gross purchase price for goods or
services used in production.

Zero Rated : Transactions in which the seller collects no output tax and the corresponding input tax
is fully refundable.
Exports are zero rated.

Exempt : Transactions in which the seller collects no output tax but the corresponding input tax
is non-refundable and absorbed by the seller.

Financial services are commonly exempt.

Most countries exempt food from the VAT.

Source: IMF & WB, 2015

6 Zero-Rating & Exemptions

Exemptions at the zero rate apply only to medical, cultural

and educational goods and services, and financial and
insurance services.
Daily necessities.
Bread and milk, books, scientific journals, medical
supplies.
Transactions relating to the exported goods and the services
provided in foreign countries.

Source: IMF & WB, 2015

 7 How Does VAT Work?

A trader registered for VAT effectively pays VAT only at one stage when he
sells his goods.

This tax is the only amount has an effect on his selling price which
includes VAT.

The VAT that he has paid as a part of his purchase price is charged on him
by his suppliers.

This is not a cost to him because he gets it back by deducting it from tax on
his sales (Output Tax).

Therefore, VAT should have a minimum impact on his selling prices.

Source: IMF & WB, 2015

8
Challenges in the Implementation of VAT

Billing System
Skilled staffing
Lack of technology systems
Lack of infrastructure facilities
Unavailable tax law/act & regulations
Provision of Points of Sale

Source: IMF, 2015

 9 Issuing Tax Bills and Invoices
According to the global standard VAT ACT, you CANNOT sell any goods
without a sales document.

The prices mentioned on these sale documents should include VAT and the
words Price includes VAT must be printed on them.

The original invoice must be handed to the customer and seller keeps a
duplicate.

For selling on credit, you are required to provide the purchaser with a tax
invoice at the time of supply in respect of that supply.

All tax invoices should be serially numbered and issued in serial number
order.
Source: IMF, 2015
10 Advantages of VAT

1. As compared to other taxes, there is a less chance of tax evasion. VAT

minimizes tax evasion due to its catch-up effect.

2. VAT is simple to administer as compared to other indirect tax.

3. VAT is transparent and has minimum burden to consumers as it is collected

in small fragments at various stages of production and distribution.

4. VAT is based on value added not on total price. So, price does not increase as
a result of VAT.

5. There is mass participation of taxpayers --- EQUALITY.

Source: IMF, 2015

11 Disadvantages of VAT

1. VAT is costly to implement as it is based on full billing system.

2. VAT is relatively complex to understand. The calculation of value added

in every stage is not an easy task.

3. To implement the VAT successfully, customers, need to be conscious,

otherwise tax evasion will be widespread.

4. VAT is too difficult to operate from the position of both the administration
and business

Source: IMF, 2015

12 Importance of Introducing VAT in KSA
Government to become more accountable (by virtue of having more tax
revenues to finance the budget).

Public perception of government to improve (by virtue of leaving more oil

revenues for future generations).

GOV. income diversification.

Applying such a measure will bring the country to the international

standards by meeting government finance statistics classification
requirements (2014 GFS Model).

Source: IMF, 2015

13 VAT and Inflation

- Concern about VAT-induced inflation unfounded.

- Probably one-time price rise when VAT introduced.
- Even VAT non-inflationary or deflationary, critical in good timing
for introducing VAT in order to avoid social tension and fear in
the public.
Impact of the VAT on general price level

Underlying price
Price level
line without VAT

Long-term price
P1 level under VAT

Po

Time
t0 t
Source: IMF, 2015
 Reasons for Low Tax Revenues in GCC
14
1. Absence of personal income tax;
2. Absence of property tax in most of the GCC;
3. Absence of customs duties on GCC products;
4. Grant of tax holidays in different industrial zones;
5. Reduction in effective tax rates on foreign corporations.

These benefits were given in order to promote direct investment,

and attract expatriates to help build up infrastructure and accelerate
broader economic activity.

Source: IMF, 2015

15 VAT and Monetary Policy

If the VAT is revenue-enhancing, it will help the

government pursue tight monetary policy, and then
the VAT may even exert downward pressure on
inflationin this case, the VAT is deflationary rather
than inflationary.

Source: IMF, 2015

16 The Implementation Process in KSA
(based on international experience)
Components requiring TA must be determined early
Steering Committee & VAT Administration Unit should be named without further delay!
Move swiftly to define the major policy issues in order to develop a white paper as the
basis for public dialogue.
Realistic timetable for VAT policy decisions and administrative programs will be essential.
The most effective standard planning period for the implementation of a VAT, is projected to
be at least over a 18-months period (International experience suggests that it takes 1824
months from the time that a decision is made for implementation).
Bring the private sector to the table (significant role)
Publicity and education program through couple phases:

o Presentations (lectures/talks/town hall meetings) targeting various economic

business sectors and civil society.
o Media presentations through speeches & discussion forums
o Production of technical and procedural manuals
Source: IMF, 2015
17 Who Should Run the Show?
Global Practice
MOF

Revenue Collection Authority/Unit

Independent from other revenue measures collections!

Source: IMF, 2015

 Requirements for Administering a Successful VAT
18

Facilitation of taxpayers to fulfill their obligation easilyfiling returns,

paying tax, easy and quick access to legislation, and technical and
administrative interpretation and information.
Integrated IT systems to support a robust compliance program including
timely detection of non-filers and stop-filers and identification of receivables
for enforcement collection.
The administrative system for the VAT should be fully technology driven.
A risk-based audit selection system.
Comprehensive audit programs and effective supervision of auditors.
Transformation of the mind-set of auditors towards adopting new approaches
to auditing VAT taxpayers.
TONS of points of sale.
A unique TIN used by all revenue agencies including Customs is an important
prerequisite for effective VAT administration (tax administration facilitates
information-sharing)
no TIN is assigned to more than one taxpayer

Source: IMF & WB, 2015

19 Cont.
The success of a VAT is heavily reliant on the exchange of
information between revenue and other government agencies.

Establishment of a registration system.

Staffing & Recruitment & Training.

Limiting the scope of exemptions at the beginning.

Prepare manuals covering all operational areas to become the desk file

Source: IMF, 2015

 Characteristics of a Successful Functional
20
Structure in Tax Administration

A strong HQ organization, which is responsible for:

Preparing an annual national work plan;
Monitoring and reporting on performance against the work plan through the
year;
Designing and maintaining standardized processes and policies; and
Providing advice and guidance to operational units.

A distinct organization for field operations and delivery, structured

across all taxes into:
audit and investigations;
collections and enforcement; and
registration and taxpayer servicesincluding returns and payments processing.

Source: IMF, 2015

 Proposed Structure of the VAT law
21

Source: IMF, 2015

22 VAT Pricing Options

Some countries require the VAT content of a price to be shown clearly

and separately from the tax-free price so that the buyer is fully aware of
his tax liability.
Others claim that buyers want to know the full cost of a good including
tax and do not wish to be faced with an additional fee at the retail point.

Example:
$99.00, or
$99.00 (including VAT), or
$90.00 + $9.00 = $99.00, or
$90.00 + $9.00 (VAT) = $99.00

Source: IMF, 2015

23
The VAT in GCC

Agreement on a common GCC VAT law framework;

Each GCC country to have its own VAT law formulated in
line with common GCC VAT framework;
VAT law to be implemented simultaneously in all GCC
countries. Timetable yet to be decided.
The initial VAT rate to be set at less or equal to 5%.
Negotiations to reach an agreement on some common tax
exemptions.

Source: IMF, 2015

 Cont.
24

If designed well, it could generate GCC countries additional revenues in

the range of 1.5 - 2 percent of GDP or 2.5 - 3.5 percent of non-oil GDP
even with relatively low rates;

IMF has estimated that Saudi Arabia could generate additional tax revenue
in the range of 1 - 1.6 percent of GDP based on a VAT rate set in the range
of 3 - 5 percent.

IMF has already provided technical assistance for the design of a VAT in
the region, both regionally and to national governments since the late
1990s.

Source: IMF, 2015

 Extent of GCC Governments Dependence
25
on Oil Revenues
Figures based on 2012-14 Data
Total Revenues Total GDP Non-oil GDP

Oil revenues (as % of): 79.8 37.4 77.0

Non-oil revenues (as % of): 20.2 9.4 18.4

Investment income 16.8 7.8 15.3

on public assets

Tax revenues 3.4 1.6 3.1

Source: IMF, 2015

26 GCC Countries: Revenue Structure (201214)

Source: IMF, 2015

27 Breakdown of Tax Revenue in GCC

Source: IMF, 2015

28
Saudi Arabia Components of Tax
Revenues in 2014

Trade tax = 0.9% of GDP

Corporate tax = 0.0% of GDP

Income tax = 0.0% of GDP

Goods/Services tax = 0.0% of GDP

Other tax = 0.5% of GDP

Tax revenue = 1.4% of GDP (very low)

Source: IMF & SAMA, 2015

29 Estimation of VAT Revenue in KSA

Source: IMF, 2015

30 Key Implementation Tasks

Source: IMF, 2015

31
Preparatory Timetable for Introduction VAT

Source: IMF, 2015

32 Appendix

Source: MOF, Saudi Arabia, 2015